Financial Markets & Services

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Why funds are raised by Companies ..

Companies raise funds to finance their projects through various methods. The promoters
can bring their own money of borrow from the financial institutions or mobilize capital
by issuing securities. The funds maybe raised through issue of fresh shares at par or
premium, preferences shares, debentures or global depository receipts.
The main objectives of a capital issue are given below:
To promote a new company
To expand an existing company
To diversify the production
To meet the regular working capital requirements
And so on

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SEBI has laid down entry norms for entities making a public issue/ offer.
The same are detailed below
An unlisted issuer making a public issue i.e (making an IPO) is required to satisfy
the following provisions: Entry Norm I (commonly known as Profitability
Route)
The Issuer Company shall meet the following requirements:
(a) Net Tangible Assets of at least Rs. 3 crores in each of the preceding three full
years.
(b) Distributable profits in atleast three of the immediately preceding five years.
(c) Net worth of at least Rs. 1 crore in each of the preceding three full years.
Total assets minus total liabilities = net worth
Tangible Net Worth = Total Assets - Total Liabilities - Intangible Assets
(d) If the company has changed its name within the last one year, at least 50%
revenue for the preceding 1 year should be from the activity suggested by the new
name.
(e) The issue size does not exceed 5 times the pre issue net worth as per the audited
balance sheet of the last financial year.
In addition to satisfying the aforesaid entry norms, the Issuer Company shall also
satisfy the criteria of having at least 1000 prospective allotees in its issue.
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Besides entry norms, are there any mandatory provisions which an

issuer is expected to comply before making an issue?

Minimum Promoters contribution and lockin:

In a public issue by an unlisted issuer, the promoters shall contribute
not less than 20% of the post issue capital which should be locked in
for a period of 3 years. Lockin indicates a freeze on the shares. The
remaining pre issue capital should also be locked in for a period of 1
year from the date of listing. In case of public issue by a listed issuer
[i.e. FPO], the promoters shall contribute not less than 20% of the post
issue capital or 20% of the issue size.

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What are the different kinds of issues which can be made

by an Indian company in India?

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(a) Public issue:

When an issue / offer of securities is made to new investors for becoming part of shareholders family
of the issuer , it is called a public issue. Public issue can be further classified into Initial public offer
(IPO) and Further public offer (FPO). The significant features of each type of public issue are
illustrated below:
(i) Initial public offer (IPO):
When an unlisted company makes either a fresh issue of securities or offers its existing securities for
sale or both for the first time to the public, it is called an IPO. This paves way for listing and
trading of the issuers securities in the Stock Exchanges.

NCML : Issue Open: Dec 29, 2014 - Jan 9, 2015

Issue Type: 100% Book Built Issue IPO
Issue Size: 6,000,000 Equity Shares of Rs. 10
Issue Size: Rs. 48.00 - 54.00 Crore
Face Value: Rs. 10 Per Equity Share
Issue Price: Rs. 80 - Rs. 90 Per Equity Share
Market Lot: 125 Shares
Minimum Order Quantity: 125 Shares
Listing At: BSE, NSE
(ii) Follow-on Public Offerings (FPO) :
When an already listed company makes either a fresh issue of securities to the public or an offer for
sale to the public,it is called a FPO.
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(b) Rights issue (RI):

When an issue of securities is made by an issuer to its shareholders
existing as on a particular date fixed by the issuer (i.e. record date), it is called an
rights issue. The rights are offered in a particular ratio to the number of
securities held as on the record date.
Example: 27-1-15 Ratio:- 3:10 Rate:- 10 FV at Premium 440/- CMP:- 701
(c) Bonus issue:
When an issuer makes an issue of securities to its existing shareholders as on a
record date, without any consideration from them, it is called a bonus issue.
The shares are issued out of the Companys free reserve or share premium
account in a particular ratio to the number of securities held on a record date.
COMPANY :Delton Cables
Bonus Ratio DATE Announcement
Record
Ex-Bonus
2:1
12-12-2014
27-01-2015
23-01-2015
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(d) Private placement:

When an issuer makes an issue of securities to a select group of persons not exceeding 49,
and which is neither a rights issue nor a public issue, it is called a private placement.
Private placement of shares or convertible securities by listed issuer can be of two types:
(i) Preferential allotment:
When a listed issuer issues shares or convertible securities, to a select group of persons in
terms of provisions of Chapter XIII of SEBI (DIP) guidelines, it is called a preferential
allotment. The issuer is required to comply with various provisions which inter alia include
pricing, disclosures in the notice, lock in etc, in addition to the requirements specified in
the Companies Act.
(ii) Qualified institutions placement (QIP):
When a listed issuer issues equity shares or securities convertible in to equity shares to
Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP)
guidelines, it is called a QIP.
Cost Effective- Time Effective- Access Effective- Structure Effectiveness

Offer for Sale (OFS) is another form of share sale, very much similar to Further Public Offer
(FPO). OFS mechanism facilitates the promoters of an already listed company to sell or
dilute their existing shareholdings through an exchange based bidding platform.
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Various Agencies: IPO

The public issues are managed by the involvement of
various agencies i.e. underwriters, brokers, bankers,
advertising agency, printers, auditors, legal advisers,
registrar to the issue and merchant bankers providing
specialized services to make the issue of the success.
However merchant banker is the agency at the apex
level than that plan, co-ordinate and control the entire
issue activity and direct different agencies to contribute to
the successful marketing of securities.

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Primary Market
Private Placement
IPO- Two Types of Methods
A- Fixed price and
B- Book Building
- floor price, just prior to the opening date( Not in prospectus)
-Indicate a 20% price band
Fixed versus Book Building Issues: Price at which securities will be allotted is not known in case of offer of shares
through Book Building while in case of offer of shares through normal public issue,
price is known in advance to investor.
In case of Book Building, the demand can be known everyday as the book is being
built. But in case of the public issue the demand is known at the close of the issue.

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A-Fixed price
CARE IPO had total 71,99,700 equity shares on offer in the IPO, at an
issue price of ` 750 per share. 35% of the offer was available for
allocation to the retail individual bidders in accordance with the SEBI
Regulations.
When the investors apply for a companys shares in an IPO, there is a bid
lot system. With CARE IPO, the bid lot size was in multiples of 20
shares and the retail investors had the option to apply for a maximum of
13 lots (260 shares) and a minimum of 1 lot (20 shares). So, the
minimum investment in the CARE IPO was ` 15,000 and ` 1,95,000 as
the maximum.
Retail investors have been allotted only 20 shares irrespective of their
application size i.e. whether they applied for 20 shares or 260 shares or
any number of shares in between, they got only 20 shares allotted in the
ratio of 101:256 i.e. only 101 applicants got these 20 shares out of 256
applicants.
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B- Book Building process

Number of shares issued by the company = 100.
Price band = ` 30 - ` 40.
Now let's check what individuals have bid for.
Bid Number of shares
Price per share
1
20 `
40
2
10 `
38
3
20 `
37
4
30 `
36
5
20 `
35
6
20 `
33
7
20 `
30
The shares will be sold at the Bid 5 price of 20 shares for ` 35.
Because Bidders 1 to 5 are willing to pay at least ` 35 per share. The total bids from Bidders 1 to 5
ensure all 100 shares will be sold (20 + 10 + 20 + 30 + 20). The cut-off price is therefore Bid 5's
price = ` 35.
Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment because their bids
are below the cut-off price.
On allotment, the extra amount paid will be refunded to the investor. Since the cut-off price is `35,
the 10 shares will cost ` 350 (10 x ` 35). The balance ` 50 will be refunded to the investor.
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